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Rational Inattention to Discrete Choices: A New Foundation for the Multinomial Logit Model

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  • Alisdair McKay

    (Boston University)

  • Filip Matejka

    (CERGE, Prague)

Abstract

We apply the rational inattention approach to information frictions to a discrete choice problem. The rationally inattentive agent chooses how to process information about the unknown values of the available options to maximize the expected value of the chosen option less an information cost. We solve the model analytically and find that if the agent views the options as equivalent a priori, then the agent chooses probabilistically according to the multinomial logit model, which is widely used to study discrete choices. When the options are not symmetric a priori, the agent incorporates prior knowledge of the options into the choice in a simple fashion that can be interpreted as a multinomial logit in which an option's a priori attractiveness shifts its perceived value. Unlike the multinomial logit, this model predicts that duplicate options are treated as a single option.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 535.

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Date of creation: 2011
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Handle: RePEc:red:sed011:535

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  1. Jörgen Weibull & Lars-Göran Mattsson & Mark Voorneveld, 2007. "Better May be Worse: Some Monotonicity Results and Paradoxes in Discrete Choice Under Uncertainty," Theory and Decision, Springer, vol. 63(2), pages 121-151, September.
  2. Luo Yulei & Young Eric R, 2009. "Rational Inattention and Aggregate Fluctuations," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-43, April.
  3. Yulei Luo, 2008. "Consumption Dynamics under Information Processing Constraints," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 366-385, April.
  4. Bartosz Mackowiak & Mirko Wiederholt, 2009. "Optimal Sticky Prices under Rational Inattention," American Economic Review, American Economic Association, vol. 99(3), pages 769-803, June.
  5. Daniel McFadden, 2001. "Economic Choices," American Economic Review, American Economic Association, vol. 91(3), pages 351-378, June.
  6. Train,Kenneth E., 2009. "Discrete Choice Methods with Simulation," Cambridge Books, Cambridge University Press, number 9780521766555, October.
  7. Filip Matejka, 2010. "Rigid Pricing and Rationally Inattentive Consumer," CERGE-EI Working Papers wp409, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  8. Filip Matejka, 2010. "Rationally Inattentive Seller: Sales and Discrete Pricing," 2010 Meeting Papers 420, Society for Economic Dynamics.
  9. Mondria, Jordi, 2010. "Portfolio choice, attention allocation, and price comovement," Journal of Economic Theory, Elsevier, vol. 145(5), pages 1837-1864, September.
  10. Mackowiak, Bartosz Adam & Wiederholt, Mirko, 2010. "Business Cycle Dynamics under Rational Inattention," CEPR Discussion Papers 7691, C.E.P.R. Discussion Papers.
  11. Stijn Van Nieuwerburgh & Laura Veldkamp, 2010. "Information Acquisition and Under-Diversification," Review of Economic Studies, Oxford University Press, vol. 77(2), pages 779-805.
  12. Christopher A. Sims, 2006. "Rational Inattention: Beyond the Linear-Quadratic Case," American Economic Review, American Economic Association, vol. 96(2), pages 158-163, May.
  13. Mattsson, Lars-Goran & Weibull, Jorgen W., 2002. "Probabilistic choice and procedurally bounded rationality," Games and Economic Behavior, Elsevier, vol. 41(1), pages 61-78, October.
  14. Stahl, D O, 1990. "Entropy Control Costs and Entropic Equilibria," International Journal of Game Theory, Springer, vol. 19(2), pages 129-38.
  15. Mattsson, Lars-Göran & Voorneveld, Mark & Weibull, Jörgen W., 2004. "Better may be worse: Some monotonicity results and paradoxes in discrete choice," Working Paper Series in Economics and Finance 558, Stockholm School of Economics, revised 21 Apr 2004.
  16. R. McKelvey & T. Palfrey, 2010. "Quantal Response Equilibria for Normal Form Games," Levine's Working Paper Archive 510, David K. Levine.
  17. Tutino, Antonella, 2008. "The rigidity of choice: lifetime savings under information-processing constraints," MPRA Paper 16744, University Library of Munich, Germany, revised 24 Jul 2009.
  18. Luigi Paciello & Mirko Wiederholt, 2011. "Exogenous Information, Endogenous Information and Optimal Monetary Policy," EIEF Working Papers Series 1104, Einaudi Institute for Economics and Finance (EIEF), revised Jan 2011.
  19. Anas, Alex, 1983. "Discrete choice theory, information theory and the multinomial logit and gravity models," Transportation Research Part B: Methodological, Elsevier, vol. 17(1), pages 13-23, February.
  20. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
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Citations

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Cited by:
  1. Paola Manzini & Marco Mariotti, 2012. "Stochastic Choice and Consideration Sets," CEEL Working Papers 1205, Cognitive and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia.
  2. Costain, James & Nakov, Anton, 2011. "Precautionary price stickiness," Working Paper Series 1375, European Central Bank.
  3. Lena Dräger & Michael Lamla, 2013. "Imperfect Information and Inflation Expectations: Evidence from Microdata," Macroeconomics and Finance Series 201301, Hamburg University, Department Wirtschaft und Politik.
  4. Ernesto Pastén, 2012. "Rational Inattention, Multi-Product Firms and the Neutrality of Money," Working Papers Central Bank of Chile 664, Central Bank of Chile.
  5. Andrew Caplin & Mark Dean, 2013. "Behavioral Implications of Rational Inattention with Shannon Entropy," NBER Working Papers 19318, National Bureau of Economic Research, Inc.
  6. Anton Cheremukhin & Anna Popova & Antonella Tutino, 2011. "Experimental evidence on rational inattention," Working Papers 1112, Federal Reserve Bank of Dallas.
  7. Jordi Mondria & Kunal Dasgupta, 2013. "International Trade with Inattentive Importers," 2013 Meeting Papers 1074, Society for Economic Dynamics.
  8. Alisdair McKay & Filip Matejka, 2011. "Simple Market Equilibria with Rationally Inattentive Consumers," Boston University - Department of Economics - Working Papers Series WP2011-025, Boston University - Department of Economics.
  9. James Costain & Anton Nakov, 2013. "Logit price dynamics," Banco de Espa�a Working Papers 1301, Banco de Espa�a.
  10. Michael Woodford, 2014. "An Optimizing Neuroeconomic Model of Discrete Choice," NBER Working Papers 19897, National Bureau of Economic Research, Inc.
  11. Andrew Caplin & Mark Dean, 2014. "Revealed Preference, Rational Inattention, and Costly Information Acquisition," NBER Working Papers 19876, National Bureau of Economic Research, Inc.
  12. James M. Sallee, 2013. "Rational Inattention and Energy Efficiency," NBER Working Papers 19545, National Bureau of Economic Research, Inc.

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